Protecting Yourself from Investment Fraud

CornerCap has been researching investment scams that prey on the general public, particularly the senior population which is most vulnerable. We have met with leading experts, including service providers, regulators, the FBI, and Secret Service, among others. We hope to bring our investment experience to help elevate awareness of investment scams and connect people to appropriate resources to aid in prevention.

This report outlines what we have learned and what we believe people can do to avoid becoming victims of predatory scams. Any questions or suggestions, please contact CornerCap at (404) 870-0700.

Full Report

Many of us know someone who has been a victim of investment fraud. Perhaps you have been a victim yourself. It is a crime that affects millions of people each year, with sometimes devastating consequences. Prosecution is usually difficult, and recovering losses is hard to do. Our senior population is the most frequent target.

There are many great resources available to educate our communities about investment scams. What’s ironic is that while the techniques to avoid fraud are clear and straightforward, putting them into practice can be surprisingly difficult. Scam artists are great at getting people to do what they generally know they shouldn’t do.

As both service providers to the elderly and law enforcement will tell you, more needs to be done to raise awareness about investment scams: how they work, whom they target, and how to avoid them. While scams take many forms, they usually boil down to some common basics. In order to work, they typically zero in on a person’s emotional weaknesses.

To help people avoid becoming a victim of investment fraud, we believe three things need to be in place: 1) simple knowledge of the basics of a scam; 2) frank awareness of, as one service provider told us, someone’s “hot buttons”; and 3) adoption of simple behaviors to disengage from bad situations.

The Underlying Basics of a Scam

Investment scams take many forms: impersonations of trusted advisors, Ponzi schemes, affinity programs, advance fee structures, fraudulent letters of credit, hot penny stocks, to name a few. They can occur by mail, phone, e-mail or personal contact. They are constantly evolving, with old forms morphing into more modern approaches.

Some are famous or well reported: Bernie Madoff (Ponzi), Stratton Oakmont (penny stocks), Bayou Hedge Fund (fake returns), and James Paul Lewis Jr.’s Financial Advisory Consultants (affinity, Ponzi). Most, however, are anonymous, and equally devastating to the victims.

Prevention does not require being able to recognize every possible, evolving scam, in our view. Instead, we believe people are best served by knowing that most scams have similar structures and techniques.

We believe most investment scams contain the following characteristics:

They play on a person’s “worst traits” (fear, greed, insecurity)

They promise big returns with low risk, or large pay-offs after an initial fee

They request immediate action, usually through high pressure sales

They avoid giving direct answers to good questions

They collect private information, which can lead to identity theft.

If a potential victim can understand that “what sounds too good to be true, probably is” and recognize that they are being drawn into a hurried, emotional decision, they will be a step ahead.

Social Engineering, or “Tapping into Your Hot Buttons”

Most people believe they would be too smart to fall for a scam. They also generally know that they shouldn’t give private information like social security numbers to a stranger. And yet, after falling victim to a scam, they find they’ve done just these types of things! How does a fraudster so artfully get your guard down?

This failure illustrates the lethal effectiveness of something called social engineering. In the world of information security, social engineering involves one person manipulating someone else to make a decision that he or she might not ordinarily make.

Through this approach, a fraudster can masquerade as a legitimate source, develop a storyline that speaks to your emotions, soften your defense mechanisms, and persuade you to follow their suggestions. They can artfully tap into your “hot buttons”—pride, fear of loss, concern for a loved one, a need for “exclusivity”, etc.—to get you to comply.

The internet and social media have only added to the scammer’s arsenal. They make personal information more available and can add credibility to a fraudulent offer. In some cases, the scammer has real-time information about you, making him appear to be a knowledgeable insider.

The best con artists have done their homework on their prey, hitting someone where he or she is vulnerable. With the stage thus set, how can the potential victim possibly say “no”?!

Why Seniors Are Particularly Vulnerable

In short, senior citizens have both the financial assets and the behaviors that can reward fraudsters.

Seniors have retirement accounts and homes. They tend to have good credit ratings. They generally come from a generation taught to be polite and trusting. Some struggle with memory issues, live alone, or need increasing help. They tend to be ashamed to report that they are a victim of scams.

Fraudsters exploit these characteristics. Among seniors, women seem to be targets more often than men.

How to Disengage and Protect

The ways to avoid becoming a victim of investment fraud are clear:

For unsolicited offers from strangers: Hang up the phone. Delete the email. Ignore advice from chat rooms.

For offers from “existing advisors” like your bank, credit card company, or the IRS: Never respond immediately. Always wait until you’ve had time to understand the offer, confirm the seller’s legitimacy, or consult an independent adviser. Reply to the individual through a publicly available phone number, email or website (NOT the one they give you.)

And, as general rules:

Recognize that if an offer is too good to be true, it probably is.

Check your bank and financial statements regularly. Putting a freeze on your credit reports, which requires your personal approval to opening new credit accounts, is generally a good idea.

Onward to Prevention!

As one investigator told us, “By the time I get involved, it’s too late!” We can arm ourselves and those entrusted with our care to avoid becoming victims of investment fraud.

If we can get everyone—particularly our most vulnerable groups like seniors and those who serve them—to know themselves (their “hot buttons”), understand the common signs underlying ever-evolving scams, and simply HANG UP the phone, DELETE the email, or at minimum WAIT until tomorrow to decide, we will succeed. One person at a time.

Multi-Asset Class Strategies

Blindly following the larger university endowment model for diversification can lead to unintended consequences. Our approach rests on transparency, liquidity, and reasonable cost while recognizing that portfolios must be diversified across economic regimes.